Drillers flock to Rockies as sleepiest corner of shale awakens

Kevin Crowley and Meenal Vamburkar 12/14/2017

HOUSTON and NEW YORK (Bloomberg) -- It’s not exactly the Pike’s Peak gold rush of 160 years but with crude prices on the rise, explorers are returning to the oil-rich rock of Colorado as a way to expand beyond the shale plays of Texas and New Mexico.

During the three-year crude-market collapse, as prices fell below $27/bbl, the Denver-Julesburg basin northeast of Denver was largely abandoned as explorers tightened down drilling budgets. Now, with prices headed toward $60 on the heels of OPEC-led production cuts, the region is spurring renewed interest.

More than $2 billion of drilling deals have been announced in the last four months in the DJ basin. In addition, Colorado has seen more than $1.8 billion in pipeline deals and extensions this year, according to data compiled by Bloomberg.

“With higher oil prices you get more confidence from the operators that they’ll be increasing activity over time so we’ve seen some acquisitions to bolster their inventory position,” said Chris Stevens, a New York-based analyst at Keybanc Capital Markets.

Although the sprawling Permian basin of Texas and New Mexico has been the engine room for U.S. shale production and acquisitions since the oil-price crash kicked off in 2014, this year’s resurgence in oil prices to more than $55/bbl has drillers casting their eyes further afield.

They’re turning their gaze upon the layers of shale and similar types of oil-rich rock in the DJ Basin. Drilling activity in the region has almost doubled to 23 rigs since the middle of last year, after eight out of every 10 projects in the region were canceled during the worst of the downturn. Of the four largest North American shale oil deposits, the DJ basin remains the least explored.

Recent DJ Basin Drilling Deals

Bill Barrett Corp. said Dec. 5 it plans to merge with Fifth Creek Energy in a $649 million deal Sandridge Energy said Nov. 15 it plans to merge with Bonanza Creek Energy Inc. in a $746 million deal SRC Energy said Nov. 8 it plans to buy drilling rights from Noble Energy for $568 million PDC Energy said Sept. 25 it plans to buy assets from Bayswater Exploration & Production for about $210 million Extraction Oil & Gas has spent $333 million buying access to the DJ basin since the beginning of 2016

Recent DJ Basin Pipeline Deals

Noble Energy on Tuesday said it’s partnering with EnCap Investments LP to buy Saddle Butte Rockies Midstream for $625 million DCP Midstream, a joint venture between Phillips 66 and Enbridge Inc., is spending as much as $795 million on facilities that will handle gas from DJ basin wells.

As interest has risen in Colorado, so has the cost of access. Drilling rights in core areas have changed hands for $10,000 to $15,000 an acre, “which is roughly in line or slightly more expensive than it’s been historically, as the availability of quality acreage becomes more scarce,” Stevens said.

As such, it hasn’t been plain sailing for Colorado’s new prospectors. SandRidge investor Carl Icahn has opposed that company’s purchase of Bonanza Creek, saying the board’s approach to the transaction is “a complete travesty and represents a new low in corporate governance."

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